The formal establishment of National Equities Exchange and Quotations (NEEQ) on 16 January is a milestone in the multi-level development of China’s capital markets, providing a national trading and financing platform for unlisted public companies.
With a view to regulating the placement and transfer of stocks by public companies, the China Securities Regulatory Commission (CSRC) has formulated and issued the Administrative Measures for the Regulation of Unlisted Public Companies (regulatory measures); the Guidelines for the Regulation of Unlisted Public Companies, No. 1: Information Disclosure; the Guidelines for the Regulation of Unlisted Public Companies, No. 2: Application Documents; and the Guidelines for the Regulation of Unlisted Public Companies, No. 3: Mandatory Provisions of Articles of Association. Furthermore, it issued the Management of National Equities Exchange & Quotations Ltd Interim Measures (interim measures).
The interim measures, the regulatory measures and the third set of guidelines further clarify the duties of NEEQ, enabling it to regulate public companies at the trading level. These regulations and regulatory documents are interlinked, constituting the regulatory and legal system governing public companies and patching the flaws in the public company regulatory system.
What are public companies?
The regulatory measures, formulated pursuant to the Securities Law and the Company Law, are regulations specifically for public companies. Article 2 of the regulatory measures defines the term “public company”, namely a joint stock limited company whose stock is not listed and traded on a stock exchange, and to which either of the following circumstances applies: 1) its stocks were privately offered or transferred such that, thereafter, the total number of its shareholders exceeds 200; or 2) its stocks have been transferred to the public in a public manner. Pursuant to the regulations, there are two ways in which a company can become a public company: 1) if the number of shareholders of a joint stock limited company exceeds 200, it becomes a public company, regardless of whether it has or hasn’t transferred stock to the public in a public manner; or 2) although the number of shareholders does not exceed 200, because the company transferred stocks to the public in a public manner, it becomes a public company.
The regulatory measures increase the variety of corporate forms in China. At present, China’s laws and regulations provide for the following corporate forms: limited liability company; joint stock limited company; listed company; and public company.
Three sets of guidelines
The CSRC additionally issued guidelines, Nos. 1, 2 and 3 to supplement the regulatory measures.
The guidelines, No. 1 address in a specific manner the means by which, and the circumstances under which, public companies are to disclose information, emphasise that disclosed information is to be true, accurate, complete and free from false or misleading statements, or material omissions, and specify that companies are to bear the attendant legal liability therefor. The guidelines, No. 1 additionally expressly state that public companies are required to comply with the information disclosure requirements formulated by NEEQ. As compared to information disclosures by listed companies, the information to be disclosed by public companies appears somewhat simpler.
The guidelines, No. 2 set forth specific requirements in respect of the contents and format of application documents for public transfers of stocks, private transfers and private placements by public companies: specifying that securities companies, securities service firms and their personnel are required to act with due diligence and care, and in good faith, and are required to bear the attendant legal liability for the truthfulness, accuracy and completeness of the relevant documents they issue and information cited in application documents; requiring that factual descriptive language be used in preparing application documents; expressly specifying that the method for signing documents should be signing in person by the signatories, and that name stamps or signature stamps may not be used as a substitute; and specifying that once application documents have been submitted, they may not be added to, withdrawn or replaced without the consent of the CSRC.
The guidelines, No. 3 set forth specific provisions with respect to the formulation of the articles of association of public companies. The guidelines No. 3 expressly provide that the articles of association should: set out the specific arrangement for assuring the shareholders’ right to know, right of participation, right of questioning and right to vote; state that the controlling shareholder and actual controller have an obligation of good faith; specify that the board of directors is required to discuss and assess whether the company’s governance mechanism offers all shareholders appropriate protection and equal rights, and whether the corporate governance structure is reasonable and effective; and state that when a dispute as specified in the articles of association arises between any of the company, its shareholders, directors, supervisors and senior management personnel, they should, in the first instance, resolve it through consultations.
Market maker rule
The interim measures establish the legal status of NEEQ and specify that the transfer of listed stocks can be effected by the market maker method, by agreement, by bid or by such other method as approved by the CSRC. They introduce the market maker rule for the first time, specifying that the handling securities house can provide market maker services for a the stock transfer. Furthermore, the interim measures specify that companies whose stocks are listed with NEEQ are public companies and that the number of shareholders can exceed 200. If stocks cease to satisfy the conditions for continued listing, NEEQ has the right to render a decision suspending or terminating the listing of the stocks.
The issuance of the new regulations for public companies will, on the one hand, help in erecting a legal system for the multi-level development of China’s capital markets and, on the other, will most certainly bring new business opportunities for lawyers.
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